Having a bad credit score will cost you a lot more than a higher interest rate for a few loans. It extends into many parts of your financial life. So many people fail to understand how important their credit is until they try to buy a home or take out a loan. People with bad credit usually know that they will have to pay higher interest rates. But they often don’t realize how deeply they will really be affected.
Let me give you an example. If you have a credit score of 720, you can pretty much expect to get the best rate available. For our example, that is 6%. If you have a credit score that is good, but just not perfect — say 700 — you could expect to find an interest rate of 6.15%. Not a huge difference. But if you have a credit score of 555, which is considered very poor, you can expect to pay approximately 9.6%. This could result in as much as $500 a month more on a mortgage. That’s a lot of money.
In addition to having to pay a higher interest rate, many borrowers with bad credit scores end up paying higher mortgage loan origination fees. To qualify for the much advertised zero percent of low APR financing offered by many car manufacturers, you must have near perfect credit. If you have poor credit, you will probably have to deal with a sub-prime lender (also known as the no loan is turned down lender). You could pay an interest rate of 25%!
If you already have a bad credit score, a credit card probably isn’t a good idea. But it is one of the ways to rebuild your credit. Be prepared to see interest as high 30%, if you can find a credit card at all. You will probably have to pay annual fees as well. Some people are even asked to pay a set-up fee to even get the card. It is often easier to go with a secured card than try to find an unsecured one.
Most people are unaware of the fact that insurance companies use their credit scores to determine risk. The assumption is that people with lower credit scores are at a higher risk for claims than are those with good credit. A person with good credit could pay as much as 10% less than someone with bad credit. This is seen in life insurance, homeowner’s insurance, auto insurance and other forms of insurance. Your bad credit can cost you hundreds of dollars a year in insurance premiums.
But that isn’t all. You could have to pay a higher deposit to lease or rent an apartment. You could even be turned down for a job. Low credit scores will cost you thousands of extra dollars a year. Take the steps to increase your score. While it isn’t easy and it takes time, it is well worth it.